MR. FRATTO: Thank you all for coming. I apologize. I understand that
some of your colleagues are still trying to make their way in
downstairs, but because of Chairman Lazear's tight schedule, we're going
to have to get started. You can let your folks know that we'll be
releasing a transcript this afternoon. So we'll have that for them, and
then we'll get to questions.

Chairman Eddie Lazear will lead off, but he's going to have with him two
of his most trusted colleagues, Kate Baicker, who is a member of the
Council of Economic Advisers; and the CEA's Chief of Staff Gary Blank
will join Chairman Lazear up here. Chairman Lazear will open, and then
will have an opportunity to go up for questions.

CHAIRMAN LAZEAR: Thank you for being here. Today we roll out the
Economic Report of the President for 2007. My job is an easy one this
year because the economy is strong. Last year's growth was stronger
than the previous year. We saw growth rates of about 3.4 percent.
Unemployment is low. Real wages are rising at a rapid pace, and the
prospects for future wage growth remain very good. Inflation rates are
lower than they were last year, and that, coupled with the raises that
we've been seeing, mean that workers are receiving additional buying
power -- and to give you an example, a typical family of four right now
got about a $1,000 -- slightly over a $1,000 in additional buying power
during the last year.

Our economy is also becoming more diversified. It's now being powered
in part by stronger exports and investment in business structures, in
addition to continued strong consumption. On the whole, we have a
balanced, robust economy, and all the signs are good.

This year's report picks up on the theme of productivity growth, which
has averaged 3 percent since 2001, well above the numbers from the two
prior decades. Productivity growth is important and it's key, because
it means that firms can pay workers higher wages. Indeed, real wage
growth over any significant period of time is directly linked to
productivity growth. For that reason, we must keep productivity growth
strong.

And if you've looked through the Economic Report of the President, as
you do look through it, you'll notice that not all of the chapters seem
to link directly to productivity growth, but productivity is related to
much of the report. Let me just very briefly take you through an
overview. My guess is you haven't had a chance, in the short time that
you've had this, to read the whole thing. So let me just give you a
very brief overview of it.

The first chapter that follows the productivity chapter is on pro-growth
tax policies. Taxes affect investment, and this chapter explores the
ways by which the tax code can be changed to minimize distortions.

The next chapter is on Medicare, and that's perhaps our greatest
long-run challenge on the budget front. It has implications for
productivity in a couple of respects. First, large expenditures place
pressure on the economy, as we search for ways to fund a growing
government; and second, health is a very large and growing part of our
economy, so efficiency gains that we can make in that sector will
provide a source of productivity growth.

We also have a chapter on catastrophic risk insurance. Nine-eleven and
the hurricanes taught us that we're not immune to large-scale disasters.
Finding an efficient way to insure these contingencies is important.
This chapter spells out how decisions we make at the government, both
federal and state level, can affect individual decision-making. It is
important to avoid inducing people to take actions that will put them in
harm's way, will be costly to the government, and will undermine
rational economic approaches that a private economy can provide.

The transportation sector chapter considers a couple of different
topics. First, the President has made clear his view that diversified
energy sources are important for national security. He has spelled out
a variety of programs and a variety of ways that we can use to increase
our independence of foreign sources of energy. And he's talked about
that in both the State of the Union and state of the economy address.

But, additionally, productivity suffers when Americans waste time
sitting in traffic on congested roads. We waste fuel, harm the
environment, and use too much of the most precious resource, namely our
time. So in this chapter we explore a few new ideas for dealing with
problems of congestion, both on the level of the roads and air traffic.

Currency markets -- we talk about currency markets in one of our
chapters because, in large part, productivity depends on
well-functioning capital markets. Currency markets are the thickest and
deepest of capital markets, and this chapter discusses different kinds
of currency markets and how they work. The chapter is not about
appropriate exchange rates, the discussion of which is left to the
President and the Treasury, but it does talk about how currency markets
function and how they work at a somewhat more abstract level.

We also know that international trade and, in particular, international
investment has been key to capital formation and to productivity growth
in the United States. The U.S. is the most desirable country for
investment right now, and we are the most able to attract outside
foreign direct investment and other investment because the strength of
our economy and because of our prospects for the future. Foreign
companies have invested in the United States and they provide high-wage
jobs and efficient work environments that both contribute to
productivity growth. Conversely, our multinationals that invest abroad
are also among the best companies at home and are leaders in their
industry.

The final chapter is on immigration. And immigration deals with another
kind of capital, mainly human capital, which is one of the most
important factors in productivity growth. The United States has always
been blessed by being able to attract among the most talented people in
the world. Immigration policy has a direct impact on that inflow.

The President has discussed a comprehensive immigration policy that
links border security with work site enforcement and a temporary worker
program. Well chosen policy can ensure orderly immigration that will
continue to enhance the U.S. economy and productivity growth.

And I welcome your questions.

Q I have a question dealing with tax policy. It seems in your
chapter that you are promoting this idea of partial or full extension of
investment, perhaps a better approach than rate reduction in investment.
I wonder if you could elaborate on that.

CHAIRMAN LAZEAR: Sure. Most economists like expensing as a method for
encouraging future investment. in large part, because there's a lot of
bang for the buck. And what we need by bang for the buck here is that
when you expense capital you give firms strong incentives to invest
because you affect new capital, primarily, and you don't affect old
capital as much.

So what happens is, if you lower corporate tax rates, you do have some
benefits to corporations, no doubt about it. But it tends to have a
smaller effect on investment. So if we were thinking in terms of
investment and making the economy more efficient as we go forward,
usually economists tend to favor this expensing approach. And that I
think is what's discussed in the chapter. It's not so much a choice of
one or the other in terms of benefiting one group or another group.
It's simply a question of how does one create the most investment
incentive for a given amount of tax --

Q Well, you do put this in terms of incrementals -- reform of the tax
-- so is this a shift in your approach, versus when the tax reform panel
came out, they were looking for comprehensive reform?

CHAIRMAN LAZEAR: I don't know that it's a shift. I would say that the
tax panel's approach, perhaps the main focus of the tax panel, at least
with respect to the growth and investment tax, which there were two, as
you probably recall, within that tax panel report -- and the growth and
investment one, the main -- probably the main component of that was
full expensing of capital. And it was for exactly the reasons that we
just talked about -- that the view of the people on the panel, as well
as most economists -- I think most public finance economists, most
people who have thought about these issues for a significant period of
time, is that if we're going to think about one thing that we could do
that would have dramatic effects in terms of changing the level of
investment, and changing GDP in the long run, that would probably be it.
And that's why I think the focus was on that.

But, again, in this chapter, what we were trying to do is not so much
advocate one particular proposal over another proposal, but rather to
describe the different kinds of effects that we see associated with
particular reforms.

Q You said that productivity growth is increasing, and if you look at
it in five-year windows, perhaps; but it decreased in 2006. And I'd
like you to explain why you can be certain it's not going to further
decrease in 2007, and in the next few years, why this moderation won't
continue, since many economists do see a big moderation in productivity.

CHAIRMAN LAZEAR: Productivity growth in 2006 I would describe as
volatile, having been volatile, in the sense that the fourth quarter was
a good quarter for productivity growth, the first quarter was a good
quarter for productivity growth, second and third quarter were slower
and that brought the average down. So we've still seen some volatility
within the year. That's why I tend to prefer to look over a somewhat
longer period -- I don't know if five years is the right number, but
certainly not looking quarter by quarter.

The question, though, I think that you raise is a good one, and that is,
as you look forward, what do we expect about productivity growth moving
into the future? I would say that when I think about productivity
growth in the future, I think about the fundamentals. I ask, do we have
the kind of environment that is key to projecting an economy into a new
regime in the sense of having higher levels of output, higher levels of
wages, higher levels of capital formation.

And I think we do have that kind of an economy, because, again we have a
relatively low tax economy, we have an economy that's open to trade for
the most part, we've encouraged foreign investment, all of which have
been important and instrumental in creating our economic growth. And I
don't see any move away from that. And I think that we have to make
sure that we don't move away from that. The President has been very
strong in coming out both in favor of openness of trade and in keeping
taxes low. As long as we continue to do that I think that we can
maintain high productivity growth.

On the other side of that I think I would also add that when I think
about factors that determine productivity growth, it's not only trade
and taxes, it's not only physical capital formation, but it's also human
capital formation. Human capital is absolutely crucial here. And it's
important that we make sure that we have investment in human capital.
Investments in human capital have been earning very high rates of
return. We know that going to college is a great investment and has
become an even better investment over the past 20 years. So we have to
make sure that that continues to happen, and that we have the
opportunities available to all Americans to take advantage of that.

Q So you think it will continue at a 3 percent rate? Is that what
you think?

CHAIRMAN LAZEAR: Again, I wouldn't necessarily say 3 percent. But I
would expect that we could expect to see high rates, perhaps not quite
at the 3 percent level, but somewhere -- higher than 2 percent. I would
expect somewhere closer to 3 percent. But again, we're always -- when
we're doing this sort of thing, we're guessing on two numbers. The
first number that we're guessing on is GDP growth, and the second number
we're guessing on is labor force growth, because it's really the
combination of the two that determines productivity.

So we have estimates on that, and I wouldn't want to have to bet too
much on any particular estimate of productivity growth, particularly
quarter-to-quarter. But if I'm thinking about long-term productivity
growth and asking, do the fundamentals exist for persistent high
productivity growth in the upper 2 percent range, I think we can still
be there, again as long as we continue to maintain policies that are
consistent with an open economy.

Q Two questions. The core inflation numbers in here, in the report,
fall at 2.6 percent, which is well above the Fed's comfort zone. Does
that imply that we assume a new broadening comfort zone from the Fed?
And the second question: Wages and compensation as a share -- wages as
a share of compensation flat through 2012 -- is that external factors
that have been holding back wages now --

CHAIRMAN LAZEAR: The two questions -- first, in terms of the inflation
rate, the core inflation rate, inflation was lower in 2006 than it was
in 2005, but core inflation was somewhat higher, as you point out. I
think that the Fed has been on that, obviously. They've made comments
to that effect, and we're not really saying anything different from the
Fed. We're looking at the same numbers that they look at.

The tradeoff has always been, of course, that you want to make sure that
you have a strong economy while maintaining an economy that doesn't have
too much inflationary pressure in it. And I would say that right now
we're pretty close to hitting it right on the head. Whether we like
slightly lower inflation, whether the Fed would like slightly lower
inflation, perhaps. But we're not looking at an economy that has
runaway inflation. None of the indexes that we've looked at suggest
anything like inflation getting out of hand.

The Fed remains vigilant in terms of watching those numbers; that's
their main job. And I think they've been doing a good job at it, and we
have confidence in them and I'm sure that they'll maintain that.

Your second question was on wages. With respect to wages, I like to
focus on two components of it, and you actually mentioned one in the
first part of your question, which is inflation. The way I think about
it is this: When I look at wages and try to predict what the economy is
going to do, I think of nominal wages, and then I think about
anticipated inflation. And this may sound a little bit technical, but
I'll tell you why this is important.

When firms are deciding how much -- how large a wage to give to their
workers, what they're thinking about is a nominal wage rate, like 4
percent, 4.5 percent a year, minus what they expect the inflation rate
might be in that year -- like 2 to 2.5 percent. If they're giving 4.5
percent raises, and they're expecting a 2 percent inflation rate, then,
implicitly what they're doing is giving what they think will be a 2.5
percent real wage gain.

That's what we've seen over the past year-and-a-half or so. If we look
at nominal wages minus expected inflation, it's been somewhere in the
range of 2 to 2.5 percent. And I would expect that to persist, again,
because nominal wage growth has risen while inflation rates have
declined. So if I'm looking forward and saying, how are firms thinking
about this, my view is that firms are thinking, for the most part, that
inflation is going to remain stable or decline slightly, and they're
still willing to give ever-increasing nominal wage gains. And I think
in large part, that's a reflection of the productivity that we saw over
the past few years. So I think it is the combination of the two
components that you raised.

Q In your chapter on currency markets, you talk about the difference
between China's exchange rate policy and that of the other major
industrial countries by setting a short-term interest rate target. And
you have this line in here that says -- describing the difference
between the two, you say, "Economic theory does not dictate a clear
preference between the two." If there's no preference, why would the
U.S. want China to change its currency policy?

CHAIRMAN LAZEAR: I'm not going to speak specifically to our choice over
currency policy. Again, that's something that the Treasury Secretary
has to speak about. But I will tell you what we mean in that chapter,
and that is that if we look at a variety of countries -- like the United
States, for example, there are periods during which we had relatively
fixed exchange rates and periods during which we went to a floating
exchange rate, or close to floating exchange rate. And what we've done
by moving from one to another is allowing ourselves to have more
flexibility over monetary policy. So countries have a choice over that,
and that's something that they have to think through and have to decide
about.

Now, the reason that we don't want to take a stand on that is because
it's not really our role to take a stand on that. It is the role of the
President, it is the role of the Treasury Secretary to express our view
on how we should behave and perhaps how other countries should behave.
Our goal in this chapter was simply to explain the effects of a variety
of different strategies, and that's why we said we don't want to take a
position on favoring one over another.

Q In the same chapter, you said one of the effects of the Chinese
intervention is that it hasn't changed relative to real prices between
the U.S. and China. If that's the case, isn't the trade balance
unaffected by the intervention?

CHAIRMAN LAZEAR: Well, again, as we look forward, if we're thinking
about how changing an exchange rate policy might affect -- might affect
the balance of trade between one country and another, there are two
factors. And the two factors that we talk about in here are the
exchange rate and the inflation rate. And that's really the tension
there. If you're going to play on the inflation -- I'm sorry, on the
exchange rate, then you're going to have less control over the inflation
rate, and vice versa.

If you want to have a flexible policy with respect to your inflation
rate -- for example, you want to behave in a way where you target the
interest rate -- then you can't simultaneously target the interest rate
and pick an exchange rate. So that was what we were trying to get at by
talking about the trade off between those two.

Again, that chapter is a slightly technical one, in the sense that it is
at a somewhat more abstract level. So I know you'd like to -- you might
like to have this apply to a particular country. That wasn't the
intention, and in fact I don't think --

Q (Inaudible.)

CHAIRMAN LAZEAR: Well, again, we can talk about China, we can talk
about the United States, we can talk about countries choosing a
particular regime. We're trying to remain agnostic as to whether one is
better or the other. Again, I would refer you to Hank Paulson or to the
President, of course, for questions on the specifics.

MR. FRATTO: Let me just add a bit on that point. Many of you know me
from my previous days working at the Treasury, and I'll just point you
to this. What this chapter does, I think, is give a lot of academic
rigor to some of the things that the Treasury Department and Secretary
Paulson have said about how the exchange rate affects China's economy,
in terms of their ability to affect monetary policy. So I would look at
it that way, and look at it as a -- read this chapter and take a look at
what Treasury has been saying. I think it will be a little bit
enlightening.

Q Two questions, if I may. Firstly, you have an extensive discussion
about how the tax treatments of capital, how important that is for the
purposes of productivity growth. There seems to be a much greater
emphasis on that than on any effect that income taxation would have on
productivity. So I wondered if you could -- it's my understanding that
a lot of economists do, indeed, feel that capital taxes are more
directly relevant to the productivity question than income taxes. I
wonder if you could comment on that?

And the second is, when you have a discussion of the trends in income
distribution, you've noted -- others have -- in the recent period,
post-1990, it's the middle that seems to have done not quite as well as
anybody else -- the people at the bottom actually did better than the
middle, as well. You say that the story to explain this is probably
skill-biased technical change, and yet, as Bernanke pointed out in his
speech a short while ago, it's hard to reconcile why the middle is doing
worse than the bottom -- the explanation is technical-skill bias,
technical change. Can you explain how you reconcile that in your mind?

CHAIRMAN LAZEAR: Two good questions -- not quite on the same topic, but
I'll try to get them both. The first one, on why do we focus on capital
taxation rather than on individual income taxation. I don't think we
were trying to slight individual income taxation. We do think that's
important, but that works in a slightly different way. First of all, it
tends to work on small businesses, rather than on larger businesses,
because most of that, as you know, works as a pass through and shows up
on the individual's income tax return -- so if you have a partnership or
a sub-chapter S or sole proprietorship, schedule C kind of thing, that
will show up on the individual's income tax.

And so we do think there are some pretty significant effects there. But
in terms of the total amount of capital formation, it probably isn't the
bulk of what we're thinking about, and probably the other side would be
the larger part of it.

On the income tax side, insofar as it affects the individual, we know
that labor supply tends to be relatively inelastic, relatively
insensitive to tax rates. That's one, at least in the short run, we
know that that tends to be true. That said, we also know that
investment in human capital is more sensitive to tax rates. So if you
look at countries that have had very high taxes on the rich, it may not
show up in the rich working fewer hours, at least in the short run, but
what it does tend to do is it tends to stifle the incentives to invest
in human capital. That's a big problem in countries that have capped
the ability of individuals to earn at the top end, and that would
probably be our major concern.

So when I think in terms of productivity growth, and when I think in
terms of the incentive effects of the different kinds of capital
taxation, I would probably focus more on the human capital side than I
would on the labor supply side, when thinking of that.

In terms of skill-biased technical change, my answer to you there would
be that there are two sides to this, there's supply and demand. So when
we think about the middle -- and by the way, this is a bit speculative,
because we don't have a large number of years of data here just yet.
But one of the things that a number of people have suggested is that
part of what we're seeing at the middle is a response to increases in
labor supply at the middle. There were a number of cohorts, birth
cohorts, right around 1960 that invested less in human capital than
their predecessors and their successors, which is kind of unusual,
because for the most part during the century education has been going up
-- educational attainment is going up, but not for this particular
cohort. And we can talk about the specifics of that another time, the
details aren't important.

The point is that if that group was less likely to go to college, and
more likely to stop at high school graduation, what you tended to do was
flood the labor market with individuals at the high school level, and
that would tend to push down wages. So you could still have
skill-biased technical change pulling on the demand side, but because of
this kind of bubble in terms of the number of people being supplied to
the labor market at the high school level, that would tend to do that.

Now over time, that's going to go away. If this story is right, that
should go away because subsequent cohorts are going to college. And in
fact, we may be seeing some evidence of that in the most recent years of
data, but it's very, very recent. There's only one year for which we
have the kind of data to really look at that. And there does look like
there may be some trend back in the other direction.

But, again, I don't want to speculate yet based on one year of data.
It's just too early to tell.

Q Maybe I missed something, but I didn't see in your chapter on taxes
any discussion of the alternative minimum tax. And it seems to me that
that is an extraordinarily big and pressing issue. Why isn't it in
there? And is that -- does it have anything to do with the fact that
the administration doesn't seem to want to come forward with a push on
overall tax reform?

CHAIRMAN LAZEAR: There's nothing -- there's nothing going on there with
respect to the AMT. The AMT is a tax that, as you know, was instituted
a long time ago for the purpose of taxing individuals who would
otherwise not pay any tax at the very high end. And the problem with
the AMT is because of the way it was structured, because of the lack of
indexation and the specific formulas, it ended up hitting exactly the
wrong people in the sense that it would tend to hit the middle class.

So what's happened over time is that Congress has enacted patch after
patch after patch to take care of this problem. But we've done so only
on an annual basis.

Now as we move forward, and when you think about the AMT, we know that
it's not doing what it's supposed to be doing. We know that it's not an
efficient tax, we know that it's not a well targeted tax. And currently
we are hopeful that in the next year or two, that we'll be able to work
with Congress and think about ways to remedy that.

When you remedy it, of course, you've got to figure out how you're going
to raise the revenue that that would otherwise have raised. Now, the
reality is we haven't been raising much revenue through the AMT because
we've been patching it every year. And that's something that we'll have
to work through as we move forward. But there was no attempt to ignore
it for any strategic reason.

Q If I can just follow up on that, though. I guess my question is,
this -- if you're going to talk about the economic policy issues that
are confronting the country and the administration, it seems to me on
the tax front, it would be hard to mention one that is bigger and more
pressing than that. And so it just seems puzzling that you would just
leave it unmentioned.

SECRETARY LAZEAR: Well, the focus of this chapter, remember, is
pro-growth tax reform. And when we're thinking about pro-growth tax
reform, again, I'd kind of revert to your colleague's question. If you
think about what will affect growth -- I'm not saying that the AMT is
not an issue, of course it's an issue, and it affects a large number of
taxpayers, potentially.

But when we're thinking about the effects on growth, we're thinking
about effects on capital formation, that was really the thrust of this
chapter. It wasn't thinking about specifics in the tax code. There are
many other things that we didn't discuss in that chapter that would be
important. One of the things that the President was very keen on was
simplifying the tax code. The tax code is a mess, as you know. It's
been patched about 15,000 times since the '86 reform, and it would be
nice to get that in some kind of a more sensible form then we have right
now.

We didn't address that in this chapter, either, simply because it just
wasn't the focus of the chapter. The focus was really on growth and
productivity. Again, not that the AMT doesn't have some effects on
growth and productivity, but it wasn't the direct focus of that.

Q If I could just jump back to productivity again. I know if you
slice it and dice it in different ways, it can come up with different
trends, but over the past four years, on an annual basis, productivity
growth has been decelerating. What's going to stop that from happening
over the next several years?

CHAIRMAN LAZEAR: Most of that growth deceleration is a business cycle
phenomenon. So what happens when you come out of a recession, at the
first stage of recovery, you tend to get very high rates of productivity
growth, because you're getting more output with the same amount of
labor. You have slack labor on hand, you can get additional output, so
it shows up as very high productivity growth as part of the initial part
of a business cycle recovery.

As you move into the more mature stages of a recovery, and you start
hiring labor to get the additional output, productivity growth naturally
declines. So I think what we've seen over the last five years is not
something that we are worried about in terms of predicting future
declines in productivity, but rather business cycle effects. I would
revert to my earlier answer, which is that when I think about
productivity growth as I move to the future, I really have to think
about the fundamentals -- do we have the kinds of investment in physical
capital and human capital and in technology that will allow productivity
to grow? And I think so far we do, and as long as we continue down this
path, there's no reason to expect that productivity will decline.

And, by the way, I don't think that view is just an administration view;
I think that's the market's view, as well. If you look at the evidence,
in terms of our people investing in the American economy, are they
putting money in equity markets -- you just see that we're not the only
ones that believe in productivity growth in the future.

Q In the chapter on investment, you point out that there's been some
signs that inward FDI has been heading lower in recent years. You say
that it might be systematic of deeper issues with respect to the
attractiveness of the United States. Could you elaborate a bit on what
those issues might be, and in particular, why this is sort of a warning
that Congress might want to keep in mind as they go about reforming the
CFIUS process?

CHAIRMAN LAZEAR: I think that's an excellent question. It's very
important that we make sure that we don't discourage FDI. It has been
an important force in making our economy more productive, and we have
seen some declines in FDI over the past few years. Again, it's a
relatively short time series, so it's pretty hard to know the particular
reasons for that in this short period of time.

But I think the advice that you gave is one that I would also echo,
which is that as we move forward, the last thing we want to do is
discourage other investors in other countries from investing in the
United States. We want investors to think that this is a good climate,
not only individuals who live in this country, but individuals who live
abroad. This is a good climate for investment, it is an economy that's
stable, it is an economy that's growing, and it is an economy that's
open. And as long as we continue to maintain that, I think that we will
encourage that kind of investment. To the extent that we move away from
that, I think it is problematic, and it would not be good for the
American economy.

MR. FRATTO: On that subject, I think Deputy Secretary Kimmitt over at
Treasury is delivering a speech today on that topic. You may want to
look at that.

Q I must confess, I didn't read the report cover to cover, although I
enjoyed what I did read. Did you mention Iraq and the effect that Iraq
has on the economy? I'm wondering if Iraq is a stimulus or a drag, or
why it doesn't seem to have had, to this point, a profound effect on the
economy?

CHAIRMAN LAZEAR: The way we think about issues like Iraq is we think of
them in terms of the general budgetary picture. Whether one spends on
Iraq, whether one spends on one thing or another, is not quite so
central to the economic picture. What is central to the economic
picture, though, is whether we are spending too much.

And that's an issue of the budget deficit. The budget deficit has come
down at a very rapid rate, much more rapid than predicted, and I think
the primary reason for that decline in the size of the deficit is the
fact that the economy has grown more rapidly. I mean, Congress has done
a little bit in terms of spending restraint. We've made some progress
there. But for the most part, the reality is that revenues have come
in, and they've come in at a rate higher than we predicted. Why is
that? Because the economy has grown at a rate higher than we predicted,
and that's been good for the economy and it's been good for the budget
deficit.

So when I think about these issues that have to do with the budget --
and the specifics, again, are not particularly crucial -- but the budget
-- I think the budget implications are crucial. I'm convinced that the
most important way for us to keep our budgetary situation under control
and to move in a positive direction is to keep the economy growing.

I'm a big fan of the 2003 tax cuts, the tax cuts in general, but
particularly the 2003 tax cuts. I think that if you look at the data,
it's virtually certain that that at least was in part responsible for
making the economy grow over the past few years. And I think that's,
again, an important ingredient and something that we need to continue.

MR. FRATTO: There's time for one last question, if there is one.

Q I had a question about the fiscal chapter. You mentioned that one
way to curb Medicare's cost would be to restructure this. And is this
something that you're going to bring up in discussions with Democrats?
I know that Paulson has engaged in conversations with Democrats on a
long-term plan for entitlements. Do you think that this is something
that should be part of these discussions and something that should be
part of --

CHAIRMAN LAZEAR: Well, I can't speak for Hank, but I will tell you that
we all agree that Medicare is a various -- very serious situation facing
us, not only in the distant future, but also right now. And the reason
it's facing us right now is that every time Medicare expenses go up, it
puts pressure on the current budget, and pressure on the current budget
means that it has to crowd out something else. So that's always an
issue, and it's an issue that we're thinking about right now.

I know that Secretary Paulson is very concerned about this, and that we
need to make sure that we move forward in talking with all the members
of Congress. I think there is some openness and willingness to do that.
And I know he's been working on it.

And, again, I can't really give you any specifics because this is more
Hank's deal than my deal. But it's something that we're certainly not
giving up on. We know this is a key problem, a key issue. And it's an
issue right now, as well as in the distant future. So we're on it.

Q Is that a new proposal, though? I don't think I've come across
this before, the idea of restructuring the other parts of Medicare, or
is this something the administration has brought up before?

CHAIRMAN LAZEAR: I'm not sure I know specifically what you're referring
to. So I could -- I could -- Kate, do you know -- do you know what
Karen is talking about on that?

MS. BAICKER: There have been proposals to improve the efficiency of
Medicare spending for many years. I think there's been an ongoing
discussion between the administration and members of Congress about ways
to improve the efficiency of the Medicare program, and that's about
giving beneficiaries more choices over the way that they want to consume
their care and making sure that people in different parts of the country
have access to the same high-quality care and the same level of choices.
And there are a lot of different ways you could approach that. And the
ERP doesn't pick one particular way, but tries to lay out some of the
features that would be helpful in improving getting more value out of
the Medicare system.

CHAIRMAN LAZEAR: Let me just say one thing, and that is -- you just got
to hear from Kate, who has been instrumental and one of the architects
of many of the health care proposals that this administration has been
putting forward. I'd also like to thank Gary Blank, who is the Chief of
Staff in Council of Economic Advisers. The reason this book exists is
in large part a result of Gary's efforts. He's the one who makes the
trains run on everything, but in particular on the Economic Report of
the President. So we owe him our thanks and gratitude.

MR. BLANK: Our apologies for the trains not running on time in getting
folks here.